SPEECHES & TESTIMONY

Statement of Support by Chairman Gary Gensler

Internal Business Conduct

I support the internal business conduct rule, which will lower the risk that swap dealers pose to the rest of the economy. These rules are the result of a critical reform in the Dodd-Frank Wall Street reform and Consumer Protection Act (Dodd-Frank Act) where Congress gave the Commodity Futures Trading Commission (CFTC) authority to write rules overseeing swap dealer business conduct. This rule is a collection of five CFTC proposals in four key areas.

First, the final rule establishes a number of duties for swap dealers (SDs) and major swap participants (MSPs), including a risk management program with policies and procedures to monitor and manage the risks associated with their swap activities. Among the requirements are: a) ensuring the risk management program takes into account market risk, credit risk, liquidity risk, foreign currency risk, legal risk, operational risk, settlement risk, and risk posed by traders; b) establishing a system of diligent supervision by qualified personnel over the SD and MSP activities; and c) ensuring risk management issues are elevated within management.

Second, the final rule establishes firewalls to protect against conflicts of interest that can arise between trading and research units of SDs, MSPs, futures commission merchants (FCMs), and introducing brokers. In addition, the rules establish a firewall between clearing and trading that will protect against conflicts of interest relating to a firm’s clearing activities. A 2009 Commission study on harmonization between the Securities and Exchange Commission and the CFTC recommended that the Commission establish these firewalls, which are based upon similar protections in the securities markets.

Third, the final rule establishes the reporting, recordkeeping and daily trading requirements for SDs and MSPs. Importantly, this section creates an audit trail detailing the full history of trades so the SD or MSP can better ensure compliance internally, and, when appropriate, the CFTC can be a more effective cop on the beat.

Fourth, the final rule establishes requirements for the designation of a chief compliance officer of SDs, MSPs and FCMs. This compliance officer will ensure that the firm’s policies and procedures comply with the CEA and Commission regulations. The officer will prepare an annual report describing the registrant’s compliance with its own policies, as well as CEA and Commission regulations.

Block Rule Proposal

I support the block rule proposal, which promotes both pre-trade and post-trade transparency. The derivatives reforms in the Dodd-Frank Wall Reform and Consumer Protection Act, including bringing transparency to the swaps market, will lead to significant benefits for the real economy – that which makes up over 94 percent of private sector jobs in America. Transparency also helps all Americans who depend on pension funds, mutual funds, community banks and insurance companies.

This proposal benefits from the comments we received on the real-time public reporting proposal, which included a block rule. The new methodology makes a number of significant changes from the earlier proposal. First, it is tailored so that it includes block sizes that vary by asset class and by underlying referenced product or rate. For instance, there are now 24 interest rate swap categories, 18 credit default swap categories, more than 100 commodity swap categories and more than 400 foreign currency swap categories. Second, it has been simplified, as it will no longer rely on a test, which included the so-called “social size multiple test” for setting minimum block sizes. Third, the proposal moves from being based on transaction counts to being based on the net notional amount of swaps within a category. Furthermore, this new proposal also benefits from a review of a significant amount of market data in the interest rate and credit swap markets.

The Commission is proposing a phased-in approach. Initially, the Commission is proposing specific block sizes based on the review of data for the interest rate and credit asset classes. During this initial period, the block sizes for foreign exchange and other commodity asset classes are set forth based upon the block sizes set by designated contract markets for economically related futures contracts. After an initial period, the Commission proposes using a methodology that would rely on the data collected by swap data repositories. Block sizes would be set such that 67 percent of the notional amount of a particular swap category would benefit from greater pre-trade and post-trade transparency.

We are seeking public comment about alternative methodologies, including the possibility of using the 50 percent notional amount calculation.

The rule also includes additional measures to protect the identities, market positions and business transactions of swap counterparties when their swap transactions and pricing are reported to the public.